The private certification community is becoming very concerned, if not alarmed, about the cost of insurance and the problem is compounded by an emerging tendency on the part of some insurers to insist upon exclusions that test the ability of private certifiers to comply with building legislation. This has led to [banter] about the imminent demise of private certification. If this is correct, how did it get to this?

A trip down memory lane will provide some of the answers. Private certification was established in the early 1990s. By the mid-90s, it was prevalent in all Australian jurisdictions albeit in different guises. The system allowed one to choose either a private certifier or a council building surveyor to issue building permits, carry out inspections and ultimately issue occupancy permits. In some jurisdictions like ACT, certifiers were tasked with the carrying out some of the approval functions but the occupancy permits were issued by government. There were further permutations; in some jurisdictions they were called building surveyors in others accredited certifiers.

Why was the private certification system introduced?

It came into play to speed up the building approval process. Back in the day, before the system opened up (and I’m showing my age here), building permit issue was the sole domain of local government. Builders and owners complained that it could take weeks, sometimes months to get a building permit from a council.

Why, I remember lodging a simple set of plans for a very minor renovation, so I trotted up to the council and noticed that between the hours of 10 am and 12 pm, or 2 pm and 4 pm, I could be graced with access to a building surveyor. It was a good lifestyle job for the civil servants but a tad inconvenient for the rate paying customer. Private certification revolutionised this and turnaround time plummeted as building surveyors competed with one another for building permit revenue.

When private certification was first introduced, the insurance products were fantastic. All building practitioners could get 10-year runoff cover. Based upon the French system, when a building practitioner retired, it triggered automatic runoff. This meant that the retiree was indemnified for 10 years post-retirement and consumers had the benefit of insurance protection for 10 years. It was awesome consumer protection. By the late 90s, however, the insurance industry said “enough.” They complained that the cost of underwriting the scheme was crippling and unsustainable. Fearing an underwriter exodus, the governments did away with mandatory requirement of runoff.

The risk landscape for certifiers began to change. Further, the early 90s Model Act based reforms had intended that all building practitioners were required to be registered across the board. This only occurred in some jurisdictions like NT and Victoria. Other jurisdictions like NSW chose not to insist upon the registration of all building practitioners; they opted for a regime where only residential builders and private certifiers were required by law to be registered and insured. So we had the emergence by the late 90s of profoundly divergent risk landscapes in the eight countries of Australia (i.e. the states and territories). Ominously, risk started to skew in the direction of the certifiers.

Then there was another thing that cut across the bow: in the mid-90s, the ABCB introduced a performance based building code. This allowed building surveyors to sanction alternative solutions – to choose innovative often computer modelling based design scenarios, designed to comply with the objectives of the BCA – in lieu of design proposals complying with the prescriptive or deemed to satisfy provisions of the BCA.

This was all well and good, but it was a huge game changer as for the first time in Australia, building surveyors could issue building permits based upon alternative solution design scenarios that did not comply with the prescriptive provisions of the BCA.

One bloke, one punter if you will, armed with a building surveying qualification could “green light” a development courtesy of an alternative solution that was not of the tried and true prescriptive regulation persuasion. Talk about a radical right-hand turn! Now one had a proliferation of alternative solutions being sanctioned in areas like fire compliance, where sprinklers would be deleted as other methods of fire retardant persuasion were preferred. Invariably, the alternative solutions involving the likes of the deletion of sprinklers were a cheaper option than sprinkler-containing solutions. The risk barometer was ratcheted up against private certifiers on account of the massive assumption on alternative solution base risk.

The Real Game Changer

At about the turn of the third millennium, the insurers chimed back in. Insurance lobbying posses descended upon government insisting that they don’t like to underwrite residential skyscrapers anymore, the risk is too high and we are losing money on multi-unit development claims. They intimated that they would have to “pull up stumps” unless they were freed from underwriting the mandatory legislative requirement for sky-rise multi-storey dwellings. The governments then brought in the “north of three-storey” exclusion. The upshot was that insurers no longer underwrote residential high rises for builders. But here’s the thing: private building surveyors still had to carry general professional indemnity cover for high rise residential monoliths.

So the rock star status of private certifiers as highly desirable insured defendants went through the roof overnight, particularly in jurisdictions like NSW where, unlike Victoria, certifiers had by default become the only professionals who were by law required to carry mandatory PI cover. For fear of belabouring the point, this made certifiers very, very attractive to plaintiffs. In Victoria, on the other hand, engineers, architects, draftspersons and quantity surveyors are all required to be insured. Needless to say, the risk was spread more evenly.

Not surprisingly, in garden variety lawsuits – multi-defendant legal proceedings, that is – building surveyors increasingly found themselves locked in as co-defendants.

If not as co-defendants, they were joined as third parties and this in recent times has become the bane of the building surveying sector. The insurers began to say “hullo, these guys are a bad risk, they are popping up as co-defendants everywhere” and the London-based underwriters looking from afar began to get a little churlish, bilious if you will, about this antipodean creature called a private certifier (or is it an accredited certifier?)

Premiums went up and more and more certifiers began complaining about the difficulty in getting insurance cover. More and more frequently, one heard of certifiers having to look far and wide for cover to avoid closing shop and going out of business.

The deleterious impact of all of this on the risk profile has continued to coincide with fee cannibalisation and the habit of too many builders or developers screwing certifiers down on price. So we have an unholy coalescence of hefty and increasing premiums and cutthroat fee competition. Anecdotally, there is even talk of the insurance industry pulling out of the market altogether. None of this is surprising.

All of this means that the profession is being poleaxed every which way and the risk profile of the private certification sector has become increasingly dire. Compounding the problem is an ageing demographic, for the green shoots of youth are not coming through. Whenever I address a building surveyor conference, 80 per cent of the audience members look like me: male, bald or gray or both. Not surprising, we are all well north of 50 and take my word, 50-something is not the new 40-something.

More and more certifiers are telling me that the writing is on the wall. Unless there are some profound changes, this relatively new profession may be in its twilight. This has led to the rumours that now abound about it all returning to local government. That may be well and good, depending on your point of view, but remember: in the post-GFC world there have been cutbacks to the funding of compliance departments. Latvia’s supermarket roof collapse that killed many people was in part because of the post-GFC austerity measures on account of the disbanding of the national building inspectorate. A return of the approval function to local government will not be a cure-all.

Furthermore, builders and aspiring home owners should be on notice that that which is taken for granted – swift permit delivery – may be coming to an end. And for those who have for so many years screwed surveyors down on their fees, let’s see how the numbers will stack up when one is holding a development for an extra few months on account of permit delays in councils due to human resource constraints.

This article was first published in Sourceable in 2015 https://sourceable.net/is-the-era-of-private-certification-nearly-over/

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.

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